The Case for the Buffett Rule in One Chart

September 20, 2011 at 3:22 pm

This chart, based on data from the Tax Policy Center (TPC), sums up the case for the President’s proposed “Buffett Rule”: a significant group of very wealthy people pay a smaller share of their incomes in federal income and payroll taxes than large swaths of the middle class.

Typical Middle-Class Households Face Higher Tax Rates Than Some High Income Households

There are three reasons why: 1) a large share of the income of the very wealthy comes in the form of capital gains and dividends, which are taxed at a very low rate; 2) wealthy people pay payroll taxes at a much lower rate than the middle class, and 3) itemized deductions and some other tax expenditures provide much larger tax breaks for high-income people than ordinary households.

The President has called on Congress, as part of comprehensive tax reform, to make sure that no American making more than $1 million a year pays at a lower rate than middle-income families.

On the whole, the federal tax system is modestly progressive, meaning that, on average, high-income

taxpayers tend to pay more of their income in tax than low- and moderate-income households pay. But a significant group of high-income taxpayers — particularly those who derive the bulk of their income from capital investments — may pay taxes at a lower rate than many middle class families as the result of various tax preferences.

People with incomes between $50,000 and $75,000 who receive most of their income from their paychecks (as middle-class people generally do) pay 14.9 percent of their income in federal income and payroll taxes, according to TPC. This “effective tax rate” is higher than the comparable rate faced by those people with incomes over $1 million who receive more than a third of their income from capital gains and qualified dividends.

Millionaires who receive one-third to two-thirds of their income from these preferential sources face a 14.6 percent rate. Millionaires who derive more than two-thirds of their income from these sources face a 12.0 percent rate (see graph).

The gap in effective tax rates between millionaires and middle-income people is even bigger if you also count state and local taxes, which tend to be regressive.
Policymakers can address this situation in several different ways that would make the tax system fairer and also generate much-needed revenue. Most directly, in conjunction with tax reform, they could tax capital gains and dividends at the same rate as ordinary income. Alternatively, they could enact a surtax on millionaires or a more effective alternative minimum tax on wealthy individuals.This dynamic is at odds with the widely accepted notion that higher-income people should pay a larger share of their income in taxes than middle- and lower-income people do. It’s particularly troubling given the stunning rise in inequality over the past several decades. Incomes have skyrocketed for those at the very top while stagnating for lower- and middle-income families, especially for people without a college degree.

*This post was updated on September 30, 2011.

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More About Chuck Marr

Chuck Marr

Chuck Marr is the Director of Federal Tax Policy at the Center on Budget and Policy Priorities.

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5 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. 1

    Letting the Bush tax cuts expire will hurt poor people. All taxes remove money from the economy, which slows or reverses economic growth, which hurts poor people.

    Why do you want to hurt poor people?

    • Chas #

      Tyler, wrong, wrong and wrong. Stop listening to the propaganda stations. That’s what they tell you to think. In reality, almost all of the 1% do not hire people and they would not spend any more or any less if they paid the same rate as the rest of us. They may own companies that hire people, but that is not even related to their personal assets.

      When will you learn that trickle down doesn’t?

  2. Jonathan Hendry #

    Hi Chuck,

    You recently posted “Misconceptions and Realities About Who Pays Taxes”.

    Could you dig up the numbers for the Clinton years? I’m wondering what % of taxpayers owed no Federal tax in a period of very low unemployment and a higher participation rate.

  3. S Brock #

    I disagree with the idea of taxing cap gains and dividends at ordinary income levels, but for different reasons then S. Myers. I believe there should be an incentive for people to invest and provide for their community. Investing provides money for business to perform, grow, and provide services. Dividends, some of which come from bonds, are direct investments to the community (gov’t/municipal bonds), and are doing good for the whole. This should also be encouraged.

    I don’t like the idea of “surtax” on people. That type of speech causes hurt feelings and can lead to “class warfare.” However, maybe there is a limit to the amount that is taxed at lower rates. For example, if cap gains + dividends > 1/3 of total taxable income, then only 1/3 can be taxed at the lower rate. The rest is taxed at ordinary rates.

    I think could also make changes by increasing the number of tax rates. Right now the rate has cutoffs at $100k (25%), $137k (28%), $209k (33%), and $373k (35%). If they added 1% intervals (e.g. 29%, 30%, etc.) then they could scale the income limits as well. If there were more breaks with more rates (not necessarily higher), then that would help.

  4. S myers #

    “Policymakers can address this situation in several different ways that would make the tax system fairer and also generate much-needed revenue.   Most directly, they could tax capital gains and dividends at the same rate as ordinary income.  Alternatively, they could enact a surtax on millionaires or a more effective alternative minimum tax on wealthy people.”

    From the quoted article text, I disagree with the first option for making the tax system fair by taxing cap gain and dividend income at regular tax rate. Many retirees get income from dividends and cap gains but are not millionaires. Many are in fact elderly, low or middle income persons who are using invested savings to generate income in retirement. So taxing cap gain and dividends at regular tax rate for all without regard to total income will have a deleterious effect on those individuals who can least afford a change in income. Perhaps increasing the tax on cap gain and dividends for those whose income exceeds a certain level would be more equitable.

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